Rating Action Commentary
ֳ Affirms Angola at 'B-'; Outlook Stable
Fri 15 Dec, 2023 - 5:01 PM ET
ֳ - London - 15 Dec 2023: ֳ Ratings has affirmed Angola's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B-' with a Stable Outlook.
A full list of rating actions is at the end of this rating action commentary.
Key Rating Drivers
Rating Affirmed: Angola's IDRs balance weak governance indicators, high inflation, high levels of foreign-currency denominated government debt and one of the highest levels of commodity dependence among ֳ-rated sovereigns, with higher international reserves relative to peers, current account surpluses and manageable debt repayment risks due to a still supportive oil price environment over the next two years.
Sizeable Current Account Surpluses: We expect Angola to continue to run substantial current account surpluses, albeit narrowing to 5.1% of GDP in 2023, from 9.5% in 2022, primarily reflecting the decline in Brent prices to an average USD82/bbl from USD98/bbl in 2022. We forecast the current account surplus will then remain broadly unchanged at 5.2% of GDP in 2024 (based on an average Brent price of USD80/bbl), before narrowing to 2.3% in 2025 (based on an average Brent price of USD70/bbl).
Significant Foreign Exchange Reserve Buffer: We forecast international reserves of USD14.5 billion at end-2023 (from USD14.7 billion in 2022), increasing to USD15.2 billion in 2025. The moderate increase in international reserves reflects the current account surplus largely offset by significant outflows through the financial account, associated with the operations of oil companies (trade credits and profit repatriation), sizeable government debt repayments and accumulation of balances in escrow accounts. Reserve coverage of current external payments will average 5.7 months over 2024-2025, well above the 'B' median of 3.3 months.
FX Supply to Remain Constrained: ֳ considers that FX liquidity in the Angolan economy remained constrained in 2H23, following the sharp 35% depreciation of the kwanza in June, as we understand the Angolan treasury remained absent from the domestic FX market through November, due to significant external debt repayments. While the kwanza's official exchange-rate has stabilised since July, we understand that a parallel exchange-rate has developed with a differential of about 16.0% at end-November 2023. ֳ also estimates that the FX backlog in the banking sector has increased since June.
The central bank (BNA) did not take additional measures to ease the FX scarcity beyond the immediate actions in June, when it sold USD400 million to the market and made USD320 million in FX-denominated bonds available, preferring instead to protect the country's level of international reserves. We assume the kwanza's 2024 end-of-period official exchange rate will be USD/AOA960, from an expected USD/AOA848 in 2023.
Inflation to Increase: ֳ forecasts inflation to average 24.5% in 2024 and 16.6% in 2025, from an estimated 13.8% in 2023, owing to the depreciation of the kwanza and further implementation of gasoil subsidies' reform. Inflation rose to 16.6% in October from a multi-year low of 10.6% in April, driven by higher imported inflation and an 87.5% reduction in gasoline subsidies in June. BNA hiked its key policy rate by 100bp to 18% and increased the local-currency mandatory reserves' requirement to the same level in October, to address excess liquidity in the banking system.
Weak Growth Outlook: ֳ expects Angola's real GDP growth to decline to 0.2% in 2023 and to average 1.2% over 2024-2025, from 3.0% in 2022. Weaker growth will reflect lower oil production, which we forecast to fall to an average 1.09 million barrels per day (mbpd) in 2023 and 1.05mbpd over 2024-2025, from 1.14mbpd in 2022. The higher inflation and FX scarcity will dampen consumption and the import of goods, weighing on non-oil economic activity. Our forecasts imply that Angolan economic growth will remain below the 3.3% we expect for the 'B' median over 2024-2025.
Subsidies' Reform Supports Fiscal Consolidation: ֳ expects Angola's budget to remain broadly balanced over the forecast horizon, with cash balances of 0.1% and -0.2% of GDP in 2024 and 2025 respectively, from a forecast deficit of 1.4% in 2023. Under our baseline scenario, the improvement will be driven by 50% reduction in gasoil subsidies in 2024 and a further 25% reduction in 2025, translating into 2pp of GDP in additional fiscal space through 2025. Our forecast is subject to risks from Angola's weak macroeconomic environment and the potential delay in implementation of the reform.
External Debt Schedule: We estimate the government's external amortisations will amount to USD5.6 billion in 2023, USD5.0 billion in 2024 and USD6.0 billion in 2025, compared with USD4.8 billion in 2022. Higher amortisations reflect the end of the moratorium from Chinese creditors in June 2023. Amortisations will be met through a combination of disbursements from bilateral and multilateral sources, use of government deposits and liquidity in escrow accounts related to oil-backed loans to China.
Government Debt Remains Above Peers: ֳ forecasts Angola's general government debt to increase to 80.5% of GDP at end-2023, from 60.5% in 2022, driven by the impact of the depreciation of kwanza on the government's high stock of foreign-currency debt. We expect the debt ratio to then decline to 70.0% and 66.7% of GDP in 2024 and 2025, respectively, reflecting nominal GDP growth and primary budget surpluses. Our forecasts imply that Angola's debt/GDP ratio will remain above the 'B' median of 54.4% we expect over 2024-2025. We estimate the interest/revenue ratio at a relatively high 23.9% in 2024.
Contingent Liabilities: Our debt figures do not include the stock of arrears, amounting to 5.0% of GDP (June 2023), mostly US dollar-denominated and owed to foreign construction companies. The government is also exposed to the liabilities of its SOEs, which amount to about 31.0% of GDP. Government guarantees account for just 1.6% of these SOE liabilities.
ESG - Governance: Angola has an ESG Relevance Score (RS) of '5' for both political stability and rights, and for the rule of law, institutional and regulatory quality and control of corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Angola has a low WBGI ranking at 19.1, reflecting weak institutional capacity, uneven application of the rule of law and a high level of corruption.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-External Finances and Macro: Heightened liquidity pressures, for example, as the result of a renewed sharp fall in oil prices or reduced access to external financing, leading to increased macroeconomic volatility and/or a sharp decline in international reserves.
-Public Finances: A sustained widening of the fiscal deficit leading to higher government debt/GDP, for example, owing to a sharp decline in oil prices or a marked reversal in fiscal policy stance as a consequence of rising social pressures.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
-Public Finances and External Finances: A reduction in external refinancing risks and an improvement in public and external debt sustainability, for example, through the accumulation of foreign-currency reserves and liquid fiscal savings, and/or a reduction in public and external debt ratios.
-Macro: A sustained decline in inflation and/or reduction in the macroeconomic impact from oil price volatility, for example, due to improvements in the credibility and consistency of Angola's monetary policymaking and FX management.
-Structural: A significant improvement in levels of governance as reflected in the WBGI.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
ֳ's proprietary SRM assigns Angola a score equivalent to a rating of 'CCC+' on the Long-Term Foreign-Currency (LT FC) IDR scale.
ֳ's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows:
- Structural: +1 notch, to offset the negative impact on the SRM of Angola's take-up of the Debt Service Suspension Initiative, which prompted a reset of the 'years since defaults or restructuring event' variable (which can pertain both to official and commercial debt). In this case we judged that the effect on the model output exaggerated the signal of a reduced capacity and willingness to service debt to private-sector creditors.
ֳ's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. ֳ's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
Country Ceiling
The Country Ceiling for Angola is 'B-', in line with the LT FC IDR. This reflects no material constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.
ֳ's Country Ceiling Model produced a starting point uplift of +0 notches above the IDR. ֳ's rating committee did not apply a qualitative adjustment to the model result.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Angola has an ESG Relevance Score of '5' for political stability and rights as WBGI have the highest weight in ֳ's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Angola has a percentile rank below 50 for the respective governance indicator, this has a negative impact on the credit profile.
Angola has an ESG Relevance Score of '5' for rule of law, institutional & regulatory quality and control of corruption as WBGI have the highest weight in ֳ's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Angola has a percentile rank below 50 for the respective governance indicators, this has a negative impact on the credit profile.
Angola has an ESG Relevance Score of '4' for human rights and political freedoms as the voice and accountability pillar of the WBGI is relevant to the rating and a rating driver. As Angola has a percentile rank below 50 for the respective governance indicator, this has a negative impact on the credit profile.
Angola has an ESG Relevance Score of '4' for creditor rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Angola, as for all sovereigns. As Angola has a fairly recent restructuring of public debt in 2020, this has a negative impact on the credit profile.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit .
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Country Ceiling Model, v2.0.0 (1)
- Debt Dynamics Model, v1.3.2 (1)
- Macro-Prudential Indicator Model, v1.5.0 (1)
- Sovereign Rating Model, v3.14.0 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Angola | UK Issued, EU Endorsed |